Auckland at risk if house prices fall

Massive growth in the Auckland housing market appears to have come at the expense of Wellington.

Massive growth in the Auckland housing market appears to have come at the expense of Wellington.

The latest figures from the Real Estate Institute of New Zealand show that the total value of all homes sold throughout New Zealand in the three months to the end of May was just over $11 billion and that just over $6b of those sales occurred in Auckland (refer table).

The figures also show that Auckland's growing dominance of the residential property market has mainly occurred in the last five years.

However, that means Auckland is more at risk of falling house prices and is likely to be hit harder than anywhere else in the country by rising mortgage interest rates which are expected to begin kicking in next year.

That's because the Auckland region is home to about 34 per cent of the country's population, but it accounts for 55 per cent of all residential property sales by value.

Auckland will also likely have a higher level of mortgage debt per head of population than other parts of the country, and will be hit harder when rising interest rates push up mortgage repayment levels.

Over the same three-month period in 2008, the total value of all homes sold throughout the country was $5.7b, with Auckland accounting for $2.35b (41 per cent) of that.

Much of the growth in Auckland appears to have come at the expense of Wellington, which has gone from accounting for 12.9 per cent of the value of all homes sold in 2008 to 9.5 per cent, putting it in fourth place behind Auckland, Canterbury and Waikato/Bay of Plenty, according to the REINZ's measurement of each region's total market value.

However, not all of the growth in the value of the Auckland property market can be attributed to the region having higher property prices compared to the rest of the country.

The REINZ figures show that Auckland accounted for 40 per cent of all sales (by number) in the three months to the end of May.

So the region's dominance has come through a combination of having more sales per head of population and higher average prices than the rest of the country.

That means its share of the country's $181b of mortgage debt is also likely to be higher per head of population, which would mean that when interest rates begin to rise, as they are expected to next year, Auckland is likely to be hit harder than other regions.

New Zealand Institute of Economic Research principal economist Shamubeel Eaqub said it was not surprising that property market turnover was higher in Auckland.

It had a younger population compared to the rest of New Zealand, so people were more likely to be moving houses as their family situation changed, and the region also needed more homes for both international and domestic migrants.

"Certainly we can say that the growth in borrowing that has occurred in the last 12 to 18 months has been concentrated in Auckland," he said.

"Accumulation of new debt is being disproportionately focused in Auckland and also the increase in house prices is disproportionately focused in Auckland."

That meant house prices were more likely to fall in Auckland with higher interest rates.

"In the regions, house prices are still quite low relative to their peak in 2007," Eaqub said.

"Auckland is a bit different. House prices are very high and have grown a bit from 2007 and have stretched away from incomes so the risk of falling house prices is greater in Auckland."

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